Reference no: EM132958362

Accounting for equity investments in other entities depends crucially on the level of influence the investor holds on the investee. In previous weeks, you have already learned how to account for equity investments where the investors obtain control over the investees. In Week 9, you have learned the case where the investors can exert 'significant influence' over the investees. In the former case, the investor is required to consolidate the investee's financial statements, while in the latter the investor shall apply the 'equity method' to account for the investment.

• Some commentators argue that having these very different treatments for similar investments is problematic as the distinction between control and significant influence is often unclear, which gives managers some flexbility to choose equity method to mask the underlying economic truth. However, many experts contend that different treatments are needed to reflect the extent to which the investee is integrated with the investor.

Required

Problem 1: Explain how managers can privately benefit from choosing equity method over consolidation when the determination of control and significant influence is unclear;

Problem 2: Discuss whether it is more desirable to require uniform accounting treatment for equity investments regardless of the level of influence the investor holds on the investee.